Wednesday, May 15, 2013
Iowa Court of Appeals Addresses Authority to Bind LLC
Iowa Court of Appeals Addresses Authority to Bind LLC
A recent decision of the Iowa Court of Appeals considered the question as to whether the contract purportedly signed on behalf of the LLC thereby bound it, which question was raised in response to a suit asserting the LLC with breach of that same contract. In this case, the court found that the contract at issue had not been validly signed on behalf of the LLC, and therefore, it could not be liable for breach thereof. Three Minnows, LLC v. Cream, LLC, No. 3128/12-0591 (Iowa Ct. App. April 10, 2013).
Three Minnows, LLC filed suit against Cream, LLC for breach of a management contract. At trial, at the close of the plaintiff’s case-in-chief, Cream moved for and was awarded a directed verdict on the basis that the person who had purported to bind Cream on the subject agreement did not have authority to do so.
Three Minnows, a manager-managed LLC, was owned 99% by Dean Quirk, operated a bar named “Drink.” Cream was formed as a manager-managed LLC to purchase and operate an existing bar, “The Union Bar.” The managers of Cream were George Wittgaff III and Jeff Maynes; Martin Maynes, Jeff’s brother, was a 30% of Cream, but was not a manager thereof at the time at issue. Quirk, on behalf of Three Minnows, wanted to contract out the management of Drink. After a meeting that included Martin and Jeff Maynes, Martin Maynes exchanged a number of management agreements and similar contracts with Quirk, each signed by Martin in his capacity as a member of the LLC. In addition to the management agreements, there was a license agreement signed by George Wittgaff II, allowing the Three Minnows’ bar, formerly named Drink, to operate under the name The Union Bar. Cream only learned of the management agreements with respect to what had been “Drink” when it received a letter from Three Minnows’ attorneys claiming breach of the management agreement and substantial damages.
Three Minnows filed suit against Cream for breach of the management agreements. In response to Cream’s motion for a directed verdict, the Court found that it did not “believe that any reasonable juror – there are no inferences that could be drawn from the granting of that authority [for the licensing agreement] that would lead a reasonable person to believe that Martin Mayne was authorized to execute the subsequent [management] agreement.”
After discussing procedural matters such as the standard of review and the standard for granting a directed verdict, the Court turned itself to the question of agency. Under Iowa’s LLC Act, which is an adoption of the Revised Uniform Limited Liability Company Act, a member, as such, is not an agent of the limited liability company. Then drawing distinctions between actual and apparent agency authority, the Court turned to Cream’s articles of organization, which provide in part:
Unless authorized to do so by the operating agreement, or by a manager or managers of the Company, no member, agent or employee of the Company shall have any power or authority to bind the Company in any way, to pledge its credit or to render it liable pecuniarily for any purpose.
The Court noted that these articles of organization were of public record and that Dean Quirk was aware that he could access the articles to determine whether a member, as a member, had the authority to bind the LLC. He made no effort to do so, and that was held against him.
Not being a manager of the LLC, Martin did not have the express authority to sign contracts on its behalf or otherwise bind it to a third party. As such, he had no actual authority to act on the LLC’s behalf.
Turning to the question of apparent authority, the Court found it would be impossible to infer that Martin Maynes had authority to execute the management agreements on behalf of Cream. While he may have been granted the authority to sign the licensing agreement (the opinion is internally inconsistent as to who signed the licensing agreement, Wittgaff or Martin), that did not extend to other potential agreements between the companies. Ultimately:
Three Minnows failed to satisfy its burden of proving an agency relationship existed regarding the management agreements and therefore the grant of a directed verdict was proper.
Curiously, this opinion does not anywhere discuss a claim by Three Minnows against Martin Maynes for breach of warranty of authority. See Restatement (Third) of Agency § 6.10. That may be consequent to the fact that at one point he told Quirk that he did not have authority to bind the LLCs, and Quirk accepted the documents anyway, explaining he needed them merely to arrange financing. As such, he may have been estopped from making a claim based upon the warranty of authority.
The take-away from this decision and others of its nature is that LLCs have the capacity to determine, by private ordering, who will be the agents thereof. While a corporation has officers with the capacity to bind the company, and a partnership has partners, each of whom has capacity to bind the partnership, LLCs can be set up in myriad ways that, depending upon the state law, may define the agency authority on behalf of the venture and in so doing bind third parties. Ergo, whenever entering into a contract with an LLC, it is crucial to do an investigation of who has authority to bind that venture. Failure to do so may preclude enforcement of that agreement. While in most cases a claim against the purported agent for breach of their warranty of authority will be viable, seldom will the agent’s personal assets be sufficient to provide adequate remedy.